The presentation of the fiscal year 2017 Iowa Public Employees' Retirement System (IPERS) valuation was presented at the IPERS headquarters on Dec. 7, 2017. The study is conducted each year and takes a "snapshot" of IPERS every June 30 at which time the fund was reported to be valued at $30.8 billion. Part of the purpose of the presentation relates to the development of strategy to fund the IPERS system, measure the assets and liabilities (our benefits), determine contribution rates, analyze the experience of the fund comparing what was assumed against what actually occurred, and other trends.
There have been numerous media reports and other attention over the course of the past year highlighting the unfunded actuarial liability (UAL) increases that have caused alarm for many people. It is important for our members to understand that the overall fund is still considered well-funded and the sheriffs and deputies as well as the protected class (jailers) are in very strong positions. In fact, the protected class was more than 100 percent funded until recent changes were adopted. Those changes reduced the funding level of sheriffs and deputies to 93 percent, protected class to 97.8 percent and regular class, which would include the rest of our civilian members, down to 80.4 percent. Earlier this year the IPERS Investment Board made changes to the actuarial assumptions that increased liability. The change with the greatest impact was lowering the assumed rate of investment return from 7.5 percent down to 7 percent. The changes increased the liability from approximately $5.59 billion up to $6.97 billion. Unfunded liability means that if all benefits expected to be owed had to be paid TODAY, the fund would be short. Although the changes increased the unfunded liability, it is widely accepted that this was a cautious move that places IPERS in an even stronger position by having a higher probability of meeting or exceeding the investment assumption (the investment return for FY2017 was 11.7 percent).
There are approximately 350,000 IPERS members of which 95 percent belong to the regular class, which is why the fund as a whole has a lower funded ratio (81.4 percent). Members should know that the sheriffs and deputies, as well as the protected class, HAVE ALWAYS paid the actuarial required contribution rate, which has kept these classes in a strong position. In addition to a period of poor investment returns or losses during the most recent economic recession, the problem amplified during a period of approximately 12 years that the Legislature underfunded the regular class. Changes were recommended by the IPERS Benefit Advisory Committee (BAC) and were adopted in 2010 and began being implemented in 2011 and 2012. The Investment Board now has authority to implement contribution rate changes, so a mechanism now exists to properly fund the benefits without requiring legislative action. These conditions did not develop overnight and will not be remedied overnight; however, there is a plan in place to eliminate or control the unfunded liability.
One of the changes implemented was a change in the amortization schedule (how IPERS policy was paying the debt). It used to have an open amortization policy — essentially the debt was refinanced every year to infinity and this was changed to a closed period of 30 years, of which 27 years currently remain on paying the unfunded liability. Members should expect the UAL to continue to increase in the first portion of this payment plan before it begins to go down. Similar to paying a home mortgage, the early years are not going toward reducing principal debt.
IPERS funded level is well above the median for public pension funds, where the average pension fund sits at 73 percent funded. The fund value is a smoothed value where actuarial assets must be within a corridor of 80-120 percent of pure market value and each of the three IPERS classes remain in this healthy corridor.
The contribution rates are divided 60/40 between the employer and employee within the regular and protected classes and 50/50 in the sheriffs and deputies class. The employee rate for the regular class will move from 5.95 percent to 6.29 percent of payroll on July 1, 2018. Sheriffs and deputies will move from 9.38 percent to 9.76 percent and protected class will move from 6.56 percent to 6.81 percent.
In summary, IPERS remains in a healthy funded position and the plan changes that have been and are being implemented address weaknesses in a relatively short time frame. IPERS was established in 1953, and it continues to provide a valuable benefit for our members and plans long-term (30-, 60-,100 years) for sustainability. Every other year is considered an "IPERS year" and the 2018 legislative session is one of those. We will likely see bills introduced in the upcoming legislative session proposing changes to the IPERS system, which is not unusual. The ISSDA Legislative Committee will continue to work with state legislators on this important topic that has been identified as a priority by ISSDA and the Iowa State Association of Counties. If members care about maintaining their IPERS benefits, they are encouraged to share their concerns with their respective legislators and ask them to protect IPERS in its current form as a defined benefit program.
Sheriff Steve Hoffman, Marshall County
ISSDA IPERS BAC representative
ISSDA Legislative Committee member